Quote du Jour: Dylan Grice – focus on things we know

I referred to some comments by Albert Edwards from Société Générale in a post a few days ago. Today’s quote of the day comes from his colleague on the SocGen Global Strategy Team, Dylan Grice. Not only is Grice brilliant at his game but also a wordsmith of note.

“Some have said that the key risk investors face today is ‘policy error’. But isn’t that always the key risk? Financial history is one long series of ‘policy errors’ and while policy makers labor under the delusion that they know the unknowable it will remain so. All investors can do is try to see the funny side, and focus on things we can know,” said Grice in a report titled “The lunatics are running the asylum”.

So what do we know?

Mr Grice answers as follows:

• We know that the developed economies’ demography is set to decline and that while we’re not sure what the effect will be, that Japan’s experience isn’t encouraging.

• We know that overstretched government balance sheets have historically posed an inflation risk but that bond yields are at levels rarely seen in the past few centuries, let alone decades.

• We know that entry valuations determine long-run returns and so bonds are likely to be an appalling investment here.

• We also know that while equities still aren’t cheap in an absolute sense they’re as cheap as they’ve been since the crash of 2008, so there are bound to be opportunities within these markets for providing decent long-run returns (see chart below).

• And we know that as we’re exploring the many (hopefully) profitable areas in the coming months, the Slartibartfasts [referring to the policy makers] will be in their fool’s paradise, pressing their buttons and in their own tragi-comic way, adding to the richness of the whole experience.”